The Rise and Fall of
Black Gold
February 2015
AASA Thought Leadership:
The Rise and Fall of Black Gold
Anyone who has been to the pump in the past couple of months knows that the price of gas has been
dropping. In early 2014, most consumers had adjusted to paying more than three dollars for a gallon
of gas. Currently many parts of the country are experiencing prices below two dollars per gallon
since 2009… and that is shocking. Many of AASA members are asking, “Why?”
The answer is simple… yet complicated. Put simply the reason gas prices are dropping is surplus.
We all understand economics. Less demand than supply equals lower prices. In this case, good for
the consumer, right? Well not exactly.
Average US Gas Price
$3.90
$3.70
$3.50
$3.30
$3.10
$2.90
$2.70
$2.50
$2.30
$2.10
$1.90
Source: EIA
The Rise and Fall of Black Gold
What’s Causing the Drop
The last time gas prices were this low was due to “The Great Recession”. After the 2008 recession ,
began the slow steady climb of price per gallon and consumers adjusted their driving habits and their
automobile choices when purchasing a new car.
Jason Schenker of Prestige Economics believes that the stalling of the global economy has led to the
decline in gas prices. He explained that OPEC is independently operated and that their main goal is
to maximize revenue without threatening the long term viability of oil or disrupting the global
economy. In 2014, the global economy slowed significantly mid-year which led to the decline in
crude per barrel and the eventual decline in gas prices. OPEC is trying to generate revenue, in the
hope that low prices will eventually help stimulate the global economy and lead the eventual rise in oil
prices in the coming years.
However, a divergent view on why demand can be found on oilprice.com. According to an article by
Arthur Berman, the demand for oil is down in the United States because consumers had adjusted to
the previous higher oil prices. They had adjusted their driving habits and many had even bought
more fuel efficient vehicles. The supply is up because of the increased production of US shale oil
and the return of Libya’s production. Another contributor to increased supply is Saudi Arabia. The
influx of new oil markets, has forced them to make a decision: cut production and risk prices falling
during a global slowdown, or reduce production to support prices, while losing market share.
The Upside of Cheap Gasoline
For the automotive aftermarket, there is a silver lining of cheap gas: increased miles driven. Miles
driven has been one of the leading indicators for aftermarket growth for over the past decade. There
are several other factors that come into play, but when people drive more, they generally use their
cars more and need to replace parts more frequently.
After the recession, miles driven dropped significantly. This was mostly due to the economy. When
consumers don’t have jobs, they have no reason to drive their car every morning and a lot less
income to be able to afford to do much of anything else. However, in 2014, we saw miles driven
sluggishly return to a growth state. Miles driven steadily increased about an average of 1% each
month. Cumulative travel for 2014 has increased about 1.4% year-over-year. Although these are
small improvements, this is the first year of increases we have seen in some time.
The Rise and Fall of Black Gold
Annual Vehicle-Distance Traveled (Billion
Miles)
3,300
3,100
2,900
2,700
2,500
2,300
2,100
1,900
1,700
Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1,500
Source: Department of Transportation
Annual Miles Driven Year-Over-Year
1.4%
1.2%
1.2%
1.2%
1.0%
0.9%0.8%0.9%
0.7%0.7%
0.8%
0.5%
0.4%0.4%
0.3%
0.4% 0.3%
0.6%
0.2%
0.0%
Source: Department of Transportation
Many would assume that all the money that Americans are saving at the pump would spur spending
or more driving, both drivers for the economy. However, the current retail sales data indicates that
Americans are simply pocketing the extra income (perhaps saving to purchase a new vehicle). Mr.
Schenker also mentioned that there is a threshold when gas prices are at $3.25 per gallon. When
prices fall below this threshold, SUV and light truck sales exceed 50 percent of light vehicles sold,
and a sharp drop below that threshold incentivizes increased SUV and light truck sales. This would
The Rise and Fall of Black Gold
indicated an increase in consumer confidence and perhaps will help stimulate retail sales and
economic growth.
Short term, it would appear that low gas prices are good for the automotive aftermarket. However,
long term there is some broader implications for the global economy.
The Risks with Low Gas Prices
Some of the larger economic risks posed by low oil prices is deflation. Deflation poses several risks
and is often misunderstood by consumers. Typically, consumers expect prices to drop in multiple or
all sectors. However, it typically only affects a few, in this instance gasoline. Consumers will hold off
on spending and wait for prices to continue to drop which further deflates the price and demand.
One of the biggest risks posed by deflation is that people don’t invest and hold onto cash. Second is
that it can cause a slowdown in the broader economy. As of now, inflation for 2015 is estimated to
hold in the 1.5% to 2% range if you do not include the energy crisis, according to Prestige
Economics. If you do include that, then you have no inflation in the United States, which poses some
issues mentioned earlier.
According to Mr. Schenker, as oil prices increase with the global economy we can expect more
growth results. More growth in the economy will lead to higher oil prices and a greater demand. As
of now, there is less of an inflation risk for 2016 with the core inflation (excludes energy and food)
predicted to fall between 2.5% to 3%.
When and Will Gas Prices Go Up?
Now, in late February, we are beginning to see the seasonal trend of rising gas prices that is usually
associated with early Spring and Summer. The next question is how much will the price of gasoline
rise? When will prices be back up at previous levels?
According to Mr. Schenker, global growth will drive gas prices back up with an increased demand
from consumers. Prestige Economics estimates that consumers will see $3 per gallon by the middle
or end of 2016. However, prices will not be consistently up at previous levels until late 2017. Despite
the monetary policies that are currently in place to spur growth, they can take months or years to
significantly increase demand.
Conclusion
As of now, it appears that as long as gas prices continue on their eventual increase, there is not a
huge downside risk posed by oil prices to the global economy. The automotive aftermarket should
benefit from an increase in miles driven and rising consumer confidence. This will spur more
spending in the retail sector which together can drive a positive economic outlook for the coming
years and hopefully continue to drive growth for automotive aftermarket suppliers.
The Rise and Fall of Black Gold
Produced and edited by:
 Bailey Overman, Senior Analyst, AASA
 Krysta Messier, Analyst & Coordinator, AASA
For more information about AASA Industry Analysis, please email [email protected].
Special thanks to Prestige Economics for some of the insight provided in this report:
Jason Schenker, CVA®, CFP®, ERP®, ChFC®
President
Prestige Economics, LLC
Mr. Schenker founded Prestige Economics, LLC in 2009, and his firm provides a retainer and
research service to private companies, public corporations, central banks, and institutional investors.
Bloomberg News has ranked Mr. Schenker one of most accurate financial market forecasters in the
world in 22 categories over multi-year periods, including #1 Brent crude oil price forecaster in the
world, #4 WTI crude oil price forecaster in the world, and #1 Henry Hub Natural Gas Price forecaster
in the world. Mr. Schenker regularly attends OPEC meetings, and he frequently appears in the
media. He has often guest hosted the show “Street Smart” on Bloomberg Television, and he has
published two books, including Commodity Prices 101.
The Rise and Fall of Black Gold